Finsbury Food has now released its final results for the year ended 2015.
Revenues increased considerably when compared to last year with an £80.2M growth in UK bakery revenue and a £218K increase in overseas revenue which meant that, after an increase in cost of sales, gross profits grew by £30.7M. Depreciation increased by some £2.6M year on year and operating leases increased by about £850K but R&D costs fell by £3.5M. We also see a £3.1M increase in acquisition costs and a £24.7M hike in other admin coats relating to the acquisition, increased retailer marketing support, new product development, range support, remuneration for bonuses and improvements to the workplace, and the operating profit is still some £2.4M up year on year. We then see a much smaller increase in the value of the interest rate swap and bank interest increased, although the interest on interest rate swaps did fall. After a modest increase in tax, the profit attributable to the equity holders is £6.2M, an increase of £1.8M when compared to 2014.
When compared to the end point of last year, total assets increased by £81.9M driven by a £24.5M growth in property, plant and equipment; a £23.5M increase in receivables; an £18.7M increase in goodwill; a £6.7M increase in inventories; a £5.6M growth in customer relationships (relating to the Fletchers acquisition); and a £3.1M growth in deferred tax assets, partially offset by a £2.9M fall in deferred consideration receivable. Liabilities also increased during the year due to a £31.5M growth payables and an £11.7M increase in borrowings. The end result is a net tangible asset level of £22.5M, an increase of £11.8M year on year.
Before movements in working capital, cash profits increased by £5.1M to £15.1M. This was then increased due to a growth in payables and after lower interest and tax was paid, the net cash from operations came in at £15.2M, an increase of £10.3M year on year. The group then paid £7.4M on property, plant and equipment which is likely to increase to £11M over the next year, received £3M in deferred consideration and spent a net £55M on acquisitions so that the cash outflow before financing was £44.7M. The group also paid some £1.6M in dividends and in order to pay all this, there was a net £16M drawn down in borrowings and £34.1M received from the issue of share capital. The end result is a net cash outflow of £653K to give a cash figure at the year-end of just £61K.
The total underlying profit at the UK Bakery segment was £10.9M, an increase of £4.8M year on year with some £3.1M attributable to the acquired Fletchers business. The cake business registered an increase in market share, volume and turnover and organic growth of 6% was stimulated by increased investment in promotional campaigns, outstanding performance from licensed products and innovative methods of optimising the mix for customers.
The Village Bakery, one of the group’s brands, is the country’s leading Rye bread supplier which is targeted at consumers looking to avoid wheat which seems to be a good market to be in at the moment. Similarly, Crank’s is the UK’s leading organic bread band which is another area of growth. The group also make cakes for Thorntons, which is the 4th largest brand in the ambient cake market and sales continued to grow, outperforming the market. In August Ferrero brought Thorntons but intend to retain the brand so hopefully Ferrero will wish to continue to work with the group. Thorntons is the dominant player in the cake bites market, holding a market share in excess of 40% and the last year has seen the introduction of a raft of new product innovations which broaden and enhance the offering in the market place.
The group also hold the licence to manufacture and distribute low fat cake to the UK and Ireland’s grocers under the Weight Watchers brand. The low fat cake category continues to struggle in the face of evolving consumer health and dietary requirements. Recently, however, there has been a focus on product packaging innovation to deliver better portion control to the consumer and on a stronger more impactful pack design. The group seeks to evolve and innovate the brand and offering ensuring its continued relevance.
The Character licenced celebration cake has been a key growth area for the business, driving an overall value increase of 31% over the past year. Once such license is Disney with Frozen being a resounding success story and the Marvel superhero’s of Avengers and Spiderman are ever evolving. Later in the year, the next addition of Star Wars will be released which should sell fairly well, although I am not sure Star Wars cakes will be as popular as the likes of Frozen, which is targeted at a younger age group. Other important character brands include Peppa Pig, the Turtles, Spongebob and Me to You with the new sensation that is the Minions also driving the success in this category. The total underlying profit at the Overseas division was £1.2M, an increase of £15K year on year.
The group believe that diversifying into foodservice cake as well as consolidating the existing markets of celebration cake and organic bread will deliver organic growth. Further acquisitions will introduce new product, customer or channels diversification or accelerate market consolidation in the core product areas. The recent acquisition of Fletchers introduced a significant new customer, M&S, channel (foodservice) and product diversification into muffins and croissants. The Johnstone’s acquisition similarly took the group into the coffee shop cake market for the first time.
The UK ambient cake market is valued at just over £1BN and grew by 1.2% in value over the past year so it is quite a slow growing area. Finsbury Food is the second largest supplier of pre-packed ambient cake to the UK’s multiple grocers and they have strengthened their leading position in the niche areas of focus. Annual bread and morning goods sales are over £4.8BN but the market remains flat. The group is a niche player in this market, manufacturing a range of bread and morning goods. The foodservice out of home eating sector continues to grow whole the retail environment remains challenging.
The government’s national living wage initiative presents a challenge to the group. As with other businesses in the market, expenditure on employment is a high proportion of the costs and this change is potentially inflationary. Mitigating the impact will take time and will require a greater focus on efficiency improvements and cost reduction programmes.
Overall the economic outlook remains uncertain and customers are having to adjust their offering and formats. Discounters are continuing to take market share in a grocery sector that is relatively static, although eating out does seem to be on the rise.
The group is rather dependent on a small number of important customers with three accounting for more than 10% of revenues at 21%, 14% and 11%. Indeed, the top five customers account for some 62% of total revenues, which although an improvement on the 73% last year, still indicates some key client risk.
A big change in the British Retail Consortium Food Standard will go live later in the year. This requires a focus on vulnerability assessments throughout the supply chain. All of the group’s sites have maintained a BRC A or A* grades in the year but BRC are anticipating fewer suppliers achieving the higher A and new AA scores. Additionally, the Food Standards Agency has published new salt targets for 2017, requiring work to be carried out on recipes to meet these targets. Further reductions will become significantly more technically challenging on certain types of product and the group currently sits at around 70%m compliance against the new targets.
During the year the group acquired Fletchers for a total consideration of £56.4M. This was funded in part by an oversubscribed equity raise of £35M with the rest funded through debt. Fletchers produces morning goods and specialist bread products for leading UK grocery retailers and foodservice customers. Benefits of the acquisition include complementary product ranges and new foodservice channels, and retail customer diversification. In the eight months since the acquisition, Fletchers has contributed a pre-tax profit of £3.1M. The cash consideration was paid at the acquisition date and it came with intangible assets of £8.8M and generated goodwill of £18.4M. This obviously didn’t come cheap and is a major acquisition for a company of this size but given the profitability, I think it is probably worth the price paid.
In June the group acquired Johnstone’s Just Desserts from administrators for a cash consideration of £1.6M which generated goodwill of £372K. In the half month since the acquisition, the business generated a pre-tax profit of £23K which seems pretty good and if this can be sustained, the price paid looks a steal and the acquisition offers an entry into the high-growth national coffee shop segment. Also, in May the group acquired 25% of the share capital of Dr Zak’s ltd for a consideration of £225K, of which £50K has been deferred and is payable within one year of the acquisition date. Dr. Zak’s develops and supplies high protein food including bread, pasta and bagels. All of these acquisitions together generated costs of £3.2M during the year with share placing costs of £1.5M written off against the share premium account (is that normal procedure?).
Of the total level of borrowings, the group still has some £29.6M undrawn, mainly relating to the invoice discounting facility, the revolving credit facility and the overdraft. The net debt currently stands at £21.3M compared to £8.8M at the end point of last year. The group have hedged against interest rate risks with three interest rate swaps in place with a total coverage of £14M, equivalent to 66% of year end net debt, at a weighted average rate of 2.5%. The effective interest rate for the group at the year-end, taking into account the interest rate swaps and deferred consideration with a base rate at 0.5% and LIBOR at 0.58% was 4.04%, so I’m not sure they are that effective really.
At the current share price, the shares trade on an underlying PE ratio of 13.5 which falls to 12.5 on next year’s consensus forecast which seems decent value, if not entirely spectacular. After the total dividend more than doubles, the shares are now yielding 2.4% which increases to 2.7% on next year’s consensus forecast.
Overall then this was a real year of progress for the group. Profits were up, both organically and through the contribution from Fletchers. Net assets also increased, although payables are looking rather high and operating cash flow grew with a decent amount of free cash flow which was nowhere near enough to cover the acquisition. The cake sector seems to be the growth driver at the moment with a decline in Weight Watchers cakes more than offset by character cake sales, driven by Disney, Marvel and the Minions. The national living wage is something that is likely to impact the group negatively going forward so this is a development that should be watched.
Supermarkets continue to be under pressure which may have an effect on margins into this market but the newly acquired Fletchers, which seems a little expensive, offers an entry into the growing food service market. Net debt has obviously increased due to the acquisition but seems manageable and with a 2.7% prospective dividend and forward PE ratio of 12.5 the shares look fairly decently valued and I will keep holding as I would hope the recovery story here has further to go once Fletchers has been properly integrated.
The bullish trend is clear from this graph and is still intact.
On the 25th November the group released an update covering trading in the first four months of the year. Total group revenues grew to £102M during the period with a 10.1% organic growth. The UK Bakery division grew by 8.7% and the overseas division grew by 19.4%. The Fletchers business is ow fully integrated and performing strongly and Johnstone’s is apparently integrating well. Whilst consumer confidence has improved the economic and trading outlook remains uncertain and the board anticipate that the Fletchers and Johnstone’s acquisitions will drive the majority of growth this year.
These figures look very strong so far but given the outlook statement, it seems as though the board are expecting organic growth to slow as the year progresses. Still, I am happy to continue to hold these shares.
On the 15th January the group released a pre-close trading update for the first half of the year. They stated that since the AGM update, the strong trading performance has continued through the Christmas period. Total company revenues grew by £156.6M, an increase of 46% year on year which includes like for like growth of 7.4%. The UK bakery division grew by 6.1% on a like for like basis with the overseas division up 18.8%. The prior year acquisitions are now fully integrated and performing strongly.
It is now all good news, however, as consumer markets remain challenging and organic growth has been hard on with significant promotional investment, new product development and fresh layers of infrastructure so it sounds as though margins will have taken quite a hit. Still, I will hold on for now.
On the 1st February the group announced the appointment of Marnie Millard as a non-executive director. Marnie is currently CEO of Nichols, the soft drinks group. Following over 13 years in the role, non-executive director Paul Monk announced his intention to step down from the board at the next AGM, although he will remain as a consultant to the group.